Executive summary: Domestic content bonus credits
The Department of the Treasury (Treasury) and the IRS issued domestic content bonus credit guidance on May 12, 2023. Notice 2023-38 provides rules to help taxpayers determine which energy projects and facilities qualify for the domestic content bonus tax credit. This credit ‘adder’ may apply to energy projects under Internal Revenue Code (IRC) sections 45, 45Y, 48, and 48E. Qualifying projects that satisfy the US domestic content requirements may be eligible for up to a 10% increased credit rate.
Treasury and the IRS intend to propose regulations applicable to taxable years ending after May 12, 2023. Treasury and the IRS anticipate including rules from Notice 2023-38 in forthcoming proposed regulations on the domestic content bonus credits..credits. Taxpayers may rely on the rules in this Notice 2023-38 for qualified facilities, energy projects, or energy storage technologies the construction of which begins before the date that is 90 days after forthcoming proposed regulations are published in the Federal Register.
The guidance addresses the following topics as they relate to the domestic content bonus credits:
- Domestic content requirement
- Definitions
- Adjusted percentage rule
- Retrofitted projects
- Certification requirements
An example of the adjusted percentage rule is offered in this notice to assist taxpayers in their efforts to confirm eligibility for domestic content bonus tax credits. The notice also includes a safe harbor for categorizing certain applicable project components.
Domestic content requirement: An overview
The Inflation Reduction Act (IRA) was signed into law Aug.ust 16, 2022 and included amendments to sections 45 and 48 to provide increased, or bonus, credit amounts if qualified facilities or energy projects, so-called applicable projects, contain a certain percentage of domestic content. The IRA also added new sections 45Y and 48E, which allow for increased bonus credit rates for certain qualified facilities, energy projects, or energy storage technologies that comply with similar requirements and are placed in service after Dec. 31, 2024.
The domestic content bonus credit is a 10 percent increase to section 45 and 45Y credits. For section 48 and 48E, the domestic content bonus credit is 2 percentage points, and can be 10 percentage points if certain prevailing wage and apprenticeship requirements are met.
Generally, to satisfy the domestic content requirement, all steel or iron used in a structural function and not less than the adjusted percentage of the total costs of all such manufactured products in an applicable project must be mined, produced, or manufactured in the United States. For applicable projects the construction of which begins before Jan. 1, 2025, the adjusted percentage is 40%, or 20% for offshore wind facilities.
Notice 2023-38 provides detail on two sub requirements for the domestic content bonus rate for the purposes of sections 45, 45Y, 48 and 48E:
- Steel or iron requirement
- Manufactured products requirement
These two requirements are imposed on applicable project components.
I. Steel or iron requirement
Applicable project components subject to the steel or iron requirement include construction materials made primarily of steel or iron that are structural in function. The steel or iron requirement does not apply to steel or iron used in manufactured product components or subcomponents such as screws, washers, nuts, bolts, and similar non-structural components. The steel or iron requirement is met if all manufacturing processes with respect to any steel or iron items that are applicable project components take place in the United States, except metallurgical processes involving refinement of steel additives.
II. Manufactured products requirement
Applicable project components that are manufactured products are subject to the manufactured products requirement. The manufactured products requirement is met if all applicable project components that are manufactured products are produced in the United States or are deemed to be produced in the United States through satisfaction of the adjusted percentage rule. For purposes of the manufactured products requirement, a manufactured product is considered to be produced in the United States if all of the manufacturing processes for such product take place in the U.S. and all of the manufactured product components of such manufactured product are of U.S. origin. A manufactured product component is considered to be of United States origin if it is manufactured in the United States regardless of the origin of its subcomponents.
Adjusted percentage rule
The notice establishes the adjusted percentage rule to determine whether manufactured products, including manufactured product components, are U.S. manufactured products. The domestic cost percentage is found by dividing the domestic manufactured products and components cost by the total manufactured products cost. If the applicable project’s domestic cost percentage is greater than or equal to the adjusted percentage that applies to the applicable project, then the applicable project satisfies the adjusted percentage rule.
The notice presents an adjusted percentage rule example to assist taxpayers in determining their domestic cost percentage.
Safe harbor for categorization of applicable project components
The notice provides a safe harbor for categorizing certain applicable project components as subject to either the steel or iron requirement or the manufactured product requirement. These categorizations are based on an analysis by the Federal Transit Administration (FTA). The notice states the IRS will accept categorizations in this analysis for applicable project components and manufactured product components. The notice provides a table to assist in identifying certain applicable project components and manufactured product components identified with respect to land-based and offshore based wind facilities, utility-scale photovoltaic systems, and battery energy storage technologies.
Retrofitted projects
Consistent with prior guidance, the notice provides that an applicable retrofitted project may qualify as originally placed in service even if it consists of some used property provided it complies with the 80/20 rule. To qualify for the domestic content bonus credit, the fair market value of the used property cannot be not more than 20 percent of the applicable project’s total value calculated by adding the cost of the new property to the value of the used property. An applicable project placed in service after Dec. 31, 2022 that meets the 80/20 rule may still be eligible for the domestic content bonus credit if the new property in the applicable project meets the domestic content requirement.
Certification and substantiation
To comply with the domestic content requirements, the notice states that the taxpayer must submit a statement for each applicable project for which the taxpayer is reporting a domestic content bonus credit under sections 45, 45Y, 48, or 48E certifying that any steel or iron items or manufactured products subject to the steel or iron requirement or the manufactured product requirement were produced in the United States. The applicable project must meet the domestic content requirements as of the date the project is placed in service. For each applicable project for which a taxpayer reports a domestic content bonus credit, this domestic content certification statement must accompany the taxpayer’s annual return for the first taxable year in which the taxpayer reports a domestic content bonus credit with respect to such project. Taxpayers reporting a domestic content bonus credit for a section 45 or 45Y credit must attach a copy of the initial certification statement each taxable year after the initial certification statement is filed. The domestic content certification statement must be signed by a person with legal authority to bind the taxpayer and include the following information:
- Whether the applicable project is a qualified facility, energy project, or energy storage technology
- The specific type of applicable project
- The location of the applicable project
- The date the applicable project was placed in service
- The total domestic content bonus credit amount determined in the first taxable year in which the taxpayer reports a domestic content bonus credit amount for such applicable project
In addition to the domestic content certification statement, a taxpayer reporting a domestic content bonus credit must meet the general recordkeeping requirements under section 6001 in order to substantiate that the domestic content requirement has been satisfied.
Washington National Tax takeaways
Although not comprehensive, the notice can aid project developers interested in the domestic content bonus credit as they plan the construction of qualified facilities, energy projects, or energy storage technologies. Construction commencement dates are ever important due to certain phased changes to the domestic content requirement. Taxpayers planning to monetize section 45, 45Y, 48, or 48E credits through section 6417 elective payments (‘direct pay’) must consider the domestic content requirement’s phased reduction to the benefit elective payments in future years in which the domestic content requirement is not met.
The notice hints that new forms may be released for the reporting of domestic content bonus credits. In addition to completing and filing certification statements, taxpayers should be prepared for additional compliance and substantiation requirements.
For purposes of computing the adjusted percentage rule, only certain direct materials and labor costs paid or incurred by the manufacturer of manufactured products may be included in the calculation. Taxpayers should consider their ability to gather the necessary information from the manufacturer(s) of manufactured products and manufactured product components to determine and substantiate a domestic content bonus credit. Project contracts may need to be revised to reflect the new information needed.
In order to prevent invalid or excessive credit claims, claimants must carefully follow the procedures outlined in the notice. To ensure this is done properly, taxpayers should consult with their tax advisors.
